Without a plan of action for resolving potential tax disputes, uncertainty, inefficiency and lost opportunities can result.
Brazil – fertile ground for tax Disputes
Brazilian tax authorities appear to be among the world’s more challenging tax authorities to deal with. Companies doing business within Brazil must contend with a complex web of taxes levied at the federal, state and municipal levels. Tax authorities at each level have stepped up their enforcement efforts to increase collections. The combination of tax complexity and tax authority aggression is creating disputes at all levels.
For many foreign companies, a further source of complexity and dispute is Brazil’s failure to harmonize with the Organisation for Economic Co-operation and Development (OECD) international taxation principles, for example, in its transfer pricing and thin capitalization regimes. Also contributing to Brazil’s high tax controversy levels are the lack of advance compliance programs (such as advance pricing arrangements and advance rulings).
Argentina – fiscal strain pushed down to local levels
As a consequence of the 2008 global financial crisis, Argentina’s fiscal challenges have worsened. This has put pressure on local governments to raise funds, spurring on more aggressive tax audits and collections.
As in Brazil, companies in Argentina now face increasing audit pressure from the tax authorities at all jurisdictional levels. According to KPMG’s Benchmark Survey on VAT/GST, disputes involving indirect taxes (sales/use or VAT) are most common, with 44 percent of Argentine respondents reporting disputes in this area.
Transfer pricing and thin capitalization transactions are under more scrutiny. Argentine tax authorities are also targeting specific industries, such as the agricultural sector (e.g. soy, grains).
Wherever in the world your company does business, appropriate strategies for tax compliance and tax audit defense are critical. When dealing with tax authorities, you need to be well prepared, well organized and in complete control of your facts and issues. This means:
- understanding why transactions or tax positions were taken
- being able to explain the technical basis of your understanding
- being ready to back-up your assertions through clear, comprehensive documentation.
When preparing documentation, consider your arguments from a tax auditors’ standpoint. Undertake a thorough tax risk exposure analysis to anticipate and address all possible questions and alternative arguments so you can make sure all your bases are covered. The analysis should also assess whether transactions and strategies are in line with the company’s business goals and appetite for tax risk. Given increased cooperation among tax authorities, your analysis should address potential issues and responses in all countries in which you do business.
Tax risk exposure analyses should be conducted and updated regularly, especially when:
- undertaking major transactions that may have significant tax implications
- receiving an audit query from a tax authority
- there has been a change in tax director, chief financial officer or leadership structure
- there has been an announcement or other evidence that a tax authority is targeting transactions or arrangements of a type that your company has employed (e.g. transfer pricing, cross-border deductions of interest).
As part of your exposure analysis program, completed transactions should be reviewed to ensure effective implementation. If potential noncompliance is detected, consider whether voluntary disclosure could mitigate the impact of a future assessment. Going forward, transactions and arrangements should be monitored to make sure they remain effective in light of business or regulatory change.
Addressing all points on the tax dispute continuum
KPMG member firms advise taking a cradle-to-grave approach to analyzing and addressing tax risk. On planning for a major transaction or reorganization, consider and prepare your possible responses for each stage of the tax dispute continuum. This means developing strategies and supporting documentation for filing the return, managing tax audits and queries, and determining the optimal route for resolving tax disputes and controversies – whether litigation, settlement or alternative dispute resolution techniques.
Taking this comprehensive, proactive approach will ensure you are well equipped to face any scenario and help maximize your chance of a favorable outcome.
Transaction planning and tax reporting
- Obtaining technical rulings, opinions, clearances and waivers in advance of your transactions.
- Preparing documentation and files to support tax positions in anticipation of future tax authority requests for information.
- Navigating voluntary disclosure, advance compliance and other tax authority programs.
Tax audits and queries
- Negotiating audits, responses to audit queries, and, where regulations permit, judicial appeals.
- Responding to tax authority demands for information or documentation.
- Engaging with the tax authority to agree on a project-based approach to progressing issues collaboratively.
- Working with senior officials to help ensure stated administrative policies and procedures are followed.
Tax dispute and controversy process
- Making informed decisions on preferred options for resolving difficult disputes, e.g. alternative forms of dispute resolution, settlement, and, in certain jurisdictions, litigation.
- Helping finalize settlements and ensure appropriate documentation in collaboration with the tax authority.
- Managing the tax dispute resolution process in a non-confrontational and effective manner.
When your organization finds itself under the tax collector’s microscope, will you be ready to take control and manage the tax controversy and resolution process toward its best possible end?
- What protocols do you have in place to actively manage and address tax risk to avoid future tax disputes and exposures?
- Have you proactively and thoroughly documented your tax transactions and uncertain tax positions?
- Are your analyses of your tax positions well stated, complete and supported by relevant documentation?
- Have you formulated a broad-ranging strategy for engaging with the tax authorities in order to resolve disputes or controversial tax issues?
- Do you have a clear picture of possible resolution scenarios, whether by negotiated resolution or, in some jurisdictions and if necessary, litigation of disputed tax issues?
- Do you know your options for dealing with a number of open inquiries strategically rather than on a piece-meal basis?
- Are you engaging with the tax authorities in the most effective way?
- Have you considered the impact of your resolution on your tax positions in all affected jurisdictions?
If you can answer “yes” to all of these questions, your organization is at the leading edge in its ability to protect against, prepare for, and respond to any tax authority challenge.
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